Condor Options

Trading was light today ahead of the government employment report due out tomorrow. Overall, the recent rally seems to have stalled a bit, and the volume on some of the major indexes has been light enough that there is reason to look for a developing move back down. Recall that it was the Labor Department’s report back in August that served as the catalyst for a 250 point drop in the Dow.

A major positive surprise on the jobs report might pose some risk to our positions, although given the lackluster data out today we don’t expect anything too magnificent. Speaking of our positions, let’s look at them: [full data is available to members at the Portfolio page]

IWM October iron condor #1 - we entered this position back on September 25, and it has given our more skittish members some minor ulcers! The small-cap rebound combined with the slight lift in volatility have left us currently a bit underwater on this trade. We still have a small buffer on the call side of the trade, and are looking for a modest pullback in IWM (see analysis below).

SPY October iron condor - this position is only a few days old, and is looking great. We could fall all the way to late-August/early-September levels (i.e. pre-Fed rate cut levels) of support and still be okay; alternatively, we could endure a continuation of the rally. The mark value of this position is within about a penny of where we sold it.

IWM October iron condor #2 - we entered this trade a few days ago as well to take advantage of the new index position. Per the midprice after today’s close, this position has already earned us a quick 15%! This trade also helps smooth out the aggregate risk curve of our portfolio, and in this particular circumstance we’ve taken on a bit less reward (and therefore more risk) than we usually look for in order to increase the probability of a successful trade. We also may hold this position through expiration if circumstances warrant it.

Since IWM is such a big part of our strategy this month, we’d thought we’d quickly mention the case for a modest pullback. First, we should mention that the success of our positions does not depend on any significant downturn - that’s kind of the whole point of the iron condor strategy, and we couldn’t honestly claim to be market-neutral if our trades constantly relied on directional predictions. That said, the case for a modest short-term pullback is that: 1) the index has been rising recently on declining volume, which is never a circumstance that inspires confidence; 2) the 2-day Relative Strength Index, while not screaming, still registers an overbought reading above 75; 3) unlike its friends Mr. S&P500 and Ms. DJIA, baby Russell still hasn’t come close to taking out its July highs - in other words, RUT/IWM still looks to be the weakling of the bunch.

As always, we’re keeping a close eye on our positions and will issue any alerts to members as needed. If you’re not yet a member, the waiting list is a little bit shorter these days.

[tags]iron condor, options, options trading, volatility, risk, IWM, SPY, DIA, RUT, Dow[/tags]